2015 (12) TMI 108 - AT - Income Tax

Computation of capital gains - Disallowance of cost of improvement - development of the property under joint development agreement (JDA) and subsequent cancellation as well as sale of the property - Held that - One of the expenditure has already been allowed by the AO, therefore, we are of the view that the other than the interest expenditure no other expenditure can be allowed either as cost of the acquisition or cost of improvement of the land as per the provision of sec. 48 of the Act. As regards interest expenditure, the same is allowable as cost of acquisition if paid on the amount used for acquisition of the land in question. Further the interest paid for the period prior to the joint development agreement would be allowable as cost of the acquisition. Accordingly, the AO is directed to verify and determine the interest paid on the borrowed funds used for acquisition of the land in question up to the date of Development agreement and allowed the same as cost of acquisition while computing the capital gain on the sale of land. - Decided in favour of assessee in part. Disallowance of the indexed cost of expenses - CIT(A) has confirmed the action of the AO by holding that the assessee has failed to establish that the expenditure was incurred on land and that it has resulted in any improvement of the property - Held that - The entire expenditure is claimed to have been incurred in cash. However, the assessee has not produced any bills or details of work as well as parties to whom the payment was made. What was produced by the assessee were the self made vouchers without any confirmation from the other party. It is pertinent to note that the assessee companies are in the business of development of the properties and the joint development agreement were entered into between the parties in connection with their business activities. The assessee were to get 13% of the developed property and the income from the sale the developed property would be the business income of the assessee. Therefore, any activity under the Joint Development Agreement was in the nature of business activity of the assessee. The expenditure incurred in pursuant to or as an obligation under the Joint Development Agreement can be claimed as business expenditure despite the fact that the said Joint Development project could not materialize. Therefore, the expenditure incurred subsequent to the Joint Development Agreement cannot be treated as the expenditure incurred for improvement of the capital asset in question. Accordingly, in the facts and circumstances of the case, we do not find any error or legality in the orders of the authorities below to qua this issue. - Decided against assessee.

Issues Involved:
1. Disallowance of partial cost of acquisition.
2. Disallowance of cost of improvement.
3. Indexed cost of expenses and its disallowance.

Detailed Analysis:

1. Disallowance of Partial Cost of Acquisition:
The assessee challenged the disallowance of Rs. 3,45,000/- paid to ND Patel for perfecting the title, which was not allowed by the CIT(A). The assessee argued that this sum should be considered as part of the cost of acquisition. However, the Tribunal did not specifically address this issue, indicating it might be subsumed under the broader discussion of cost of acquisition and improvement.

2. Disallowance of Cost of Improvement:
The assessee claimed a total cost of acquisition and improvement amounting to Rs. 1,32,78,425/-, which included various administrative expenses such as audit fees, professional charges, office rent, etc. The AO disallowed Rs. 1,25,78,425/- of this amount, allowing only Rs. 7,00,000/- related to suit settlement. The CIT(A) upheld this disallowance.

The Tribunal reviewed the details and found that most expenses claimed did not directly relate to the improvement of the land. Only the interest paid on borrowed funds used for the acquisition of the land up to the date of the development agreement was considered allowable. The Tribunal directed the AO to verify the interest paid on borrowed funds used for the acquisition of the land and allow it as part of the cost of acquisition.

3. Indexed Cost of Expenses and its Disallowance:
The assessee reduced the sale consideration by the indexed cost of acquisition and improvement. The AO disallowed these expenses, noting that the assessee failed to provide independent supporting evidence for the claimed expenses. The AO also observed that no development work was carried out on the land except for a boundary wall constructed by ITC group, not the assessee.

The Tribunal upheld the AO's disallowance, noting that the expenses claimed were not substantiated with proper evidence and were primarily administrative in nature. The Tribunal emphasized that any expenditure incurred under the Joint Development Agreement should be treated as business expenditure, not as an improvement cost of the capital asset.

Conclusion:
The Tribunal allowed the assessee's appeal in part, directing the AO to verify and allow the interest paid on borrowed funds used for the acquisition of the land as part of the cost of acquisition. Other claims related to administrative expenses and improvement costs were disallowed due to lack of substantiation and relevance to the improvement of the property. The appeals were partly allowed, with specific directions for verification and allowance of interest expenses.

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